More Financial Fraud That Wasn’t

If there was anyone from the banking industry who became famous – or infamous – as one of the architects of last decade’s housing bust, it was probably Angelo Mozilo.

Mozilo, a co-founder and CEO of the former Countrywide Financial Corp., found himself synonymous with the subprime mortgage crisis in the popular imagination, fueled by allegations from the Securities and Exchange Commission and scathing portrayals in the press. A 2008 New York Times profile of Countrywide board member Henry Cisneros reported that he described Mozilo’s life as defined by “the infamy that’s been brought on him, or that he brought on himself.” CNN named Mozilo one of ten “culprits of the collapse” the same year.

Arguably the most damaging characterization, however, arrived in a report by Rep. Darrell Issa, R-Calif., which highlighted internal Countrywide emails concerning the “Friends of Angelo” program. Issa followed up the 2009 report with a three-year investigation into the practice of offering discounted loans and other perks to thousands of people, some of whom were lawmakers and congressional employees.

The scathing report detailing the investigation’s results claimed that Countrywide used the “Friends of Angelo” program to secure influence on Capitol Hill. Mozilo countered that the program was simply a strategy designed to secure profitable loans in the highly competitive, pre-collapse atmosphere. Several members of Congress issued statements asserting that they were unaware they had received special terms in the first place, distancing themselves from alleged ethics violations.

There was recklessness and stupidity galore during the housing bubble, from the halls of Congress, where policymakers cheered the explosion of mortgage lending and resulting spread of homeownership, all the way down the economic ladder to the deserts of Nevada and the swamps of South Florida, where expensive subdivisions seemingly sprouted overnight with the fertilizer of cheap and abundant financing.

But was there criminal behavior? Prosecutors have spent the better part of a decade trying to find some, singularly without success.

Although this futility has not seemingly deterred prosecutors and regulators, even federal agencies cannot continue groundless witch hunts indefinitely. This June, five years after prosecutors closed a criminal probe into Mozilo’s behavior, the Justice Department informed him that it will also close its civil investigations of Countrywide, now owned by Bank of America, and of Mozilo himself. According to The Wall Street Journal, certain Justice officials were reluctant to let the case go even now, but their colleagues believed there was insufficient evidence to move forward.

It seems likely that this decision was influenced by the 2nd U.S. Circuit Court of Appeals’ holding a month prior, in which the court shocked the Justice Department by insisting that demonstrating an intent to defraud is necessary in a fraud case. The case that the court overturned focused on Countrywide’s “Hustle” program, and it originally cost Bank of America $1.27 billion.

The Justice Department recently asked the court to reconsider its ruling. The U.S. attorney’s office in Manhattan, which first brought the charges against Bank of America, said in a filing that the court had “overlooked a wealth of evidence” and said the case was of “particular concern” for the Justice Department. Given that appellate panels rarely reconsider unanimous rulings, the chances of the court reconsidering this one are slim. But while prosecutors have managed to collect hefty settlements and fines from banks and financial institutions, they have proved so little actual misconduct that it is unsurprising they are reluctant to let the “Hustle” case go.

Of course, prosecutors’ efforts to find a subprime meltdown scapegoat were focused entirely on jailing bankers – not homebuyers who lied about their income and assets to get loans they couldn’t afford, and certainly not politicians who both fostered and benefitted from the mortgage boom.

Senate ethics investigators wasted little time clearing former Sens. Kent Conrad and Chris Dodd (of the Dodd-Frank banking reform legislation) of any alleged lapses for receiving favored treatment from Countrywide under the “Friends of Angelo” program. But Mozilo had to spend eight years of his life fending off criminal and civil investigations, in which the feds freely leveled allegations that, ultimately, they were unable to back up. In the end, all he had to show for it was, evidently, a letter politely thanking him for his cooperation.

The thing about political scapegoating is that it doesn’t usually target politicians, especially prominent ones in congressional leadership positions.

The Obama administration has made the persecution of former bankers one of the country’s leading growth professions during its two terms. As the president’s tenure still has more than five months remaining, Obama’s Justice Department is still angling for ways to make Bank of America pay for the alleged sins of a Countrywide unit it did not even own when said sins were supposedly committed. The administration’s view of banks as a bottomless ATM to stuff government wallets has not changed one iota, despite the repeated rejection of its attempts at legal rationalization.

If there is a cosmic justice, as distinct from the Obama administration’s variety, it will arrive when a subsequent administration (though unlikely under a President Hillary Clinton) reveals the inner workings of how the feds targeted bankers, even when they knew their cases rested on foundations of sand. Perhaps at least a few of the more venal would-be enforcers will be called to account themselves.

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